Budget 2012: Industry should fully support GST rather than maintain silence

January, 12th 2012

Ahead of Budget 2005, former finance minister P Chidambaram wanted big ideas from industry captains. A top industrialist sought tax breaks in research and development, saying it was needed to foster innovation. His peers simply wanted more tax exemptions for their sectors. The story was much the same in Budgets that followed. So, last month, senior finance ministry officials were a bit surprised when an industry delegation led by Marico founder and Ficci president Harsh Mariwala spoke about big ideas for Budget 2012.

Opening commercial coal mining to private sector, building an inventory of government assets other than public sector units that can be monetised and a one-time amnesty to bring back money stashed overseas featured in the list. The first suggestion makes sense as it would help avert an impending power crisis due to the shortage of coal. It would mean scrapping the Coal Nationalisation Act to end state monopoly in coal. This reform brooks no delay. The other two measures would help raise revenues. But of the three, only a tax amnesty scheme would have to wait for the Budget as it would need changes in the Income-Tax Act.

For a change, the industry delegation did not ask for a cut in the corporate tax rate, saying government finances are in a bad shape. Somehow, the same logic did not hold while seeking a lower minimum alternate tax rate - a levy that was imposed to bring zero-tax companies under the net - or sectoral tax breaks. Many more exemptions will be sought when top business leaders meet finance minister Pranab Mukherjee this month-end.

The irony is that his Cabinet colleagues too want tax breaks in the sectors they oversee. Agriculture minister Sharad Pawar, for instance, has sought a tax waiver on income from animal husbandry and livestock products, saying it would help increase the supply of superior foods and tame food inflation.

The proposal to the PMO is now doing the rounds in the finance ministry. But sops must end as they are a drag on the exchequer. Will the government muster the political will to eschew exemptions? For Mr Mukherjee, worry lines are drawn, as growth has slowed down, industrial production is limping and tax revenues are faltering. Investment sentiment is weak. Reforms are, therefore, must to drive growth and also bring government finances to a better shape.

Of course, the Budget can be a platform for big-ticket announcements that go beyond tax policy changes. But the government should also renew its focus on tax reforms that have taken a back seat in the last two years. The goal should be to widen the tax base and raise the level of tax collection to GDP. The Centre's tax revenue as a proportion of GDP dropped to 10% in 2009-10 from 12% in 2007-08. The personal income tax-to-GDP ratio witnessed a sharp fall. This is hardly surprising as less than 3% of people in the country pay taxes and only a few thousand admit to earning income of over Rs 10 lakh a year. This must change.

What is more worrisome is the pittance collected from service tax that accounts for more than half of the country's GDP. Service tax as a proportion of GDP fell to 0.9% in 2009-10 from 1.03% in 2007-08. The biggest tax reform that can reverse this trend and raise the overall tax collection to GDP is the goods and services tax (GST).